U.S.-India International TradeARTICLE

By Karen Lynch

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India’s is the fastest-growing large economy in the world, with a rising middle class that can make it increasingly attractive to U.S. exporters.1,2 Many of these same companies are importers of services from India, the birthplace of outsourcing. Doing business with India is a complex challenge, given the country’s sheer size, market diversity, decentralized political system and often nontrivial obstacles to the ease of doing business and trade.

Exporting to India

India ranks as the 18th largest export market for U.S. goods,3 with $20 billion of merchandise exports in 2016.4 The biggest merchandise export categories are diamonds and gold, civil aircraft and spare parts, machinery and electrical machinery, and optic and medical instruments.5,6 The U.S. also exported $18 billion in services such as tourism and education to India in 2015.7,8 The dollar has risen about 10 percent against the Indian rupee over the past two years, which could be a factor in the drop in exports from $21.5 billion in 2015.9,10 However, the rupee has generally held its ground against the dollar over the past year, within a range of four percentage points.11

India’s growing potential as an export market has garnered significant attention, with its population of 1.33 billion,12 gross domestic product of $2.1 trillion in 2015,13 and GDP growth officially projected at 7.1 percent in the government’s fiscal year (FY) 2016-17.14 All of which does not preclude headwinds. For example, some economists have pared this growth forecast to 6.3-6.4 percent, for reasons including the government's scrapping of high-value bank notes last November.15

Indian GDP per capita was $6,100 in 2015.16 That said, the rising middle class in India is spending more these days. The Indian median income per household is forecast to increase by about 90 percent from 2015 to 2030, reaching $10,073. “This level of median income will not only give the Indian middle class a discretionary spending power, but will also help to transform the country’s consumer market from a ‘bottom of the pyramid’ market towards a middle-class consumer market with greater and more sophisticated demand,” according to analysis from the Euromonitor market research firm.17

Digital e-commerce is a growing opportunity, as well, with 462 million Indian internet users.18 Shoppers in India spent some $8.7 billion on international e-commerce sites in 2016, with growth estimated at 85 percent in 2017, according to PayPal.19 The top three cross-border shopping destinations are the U.S. (14 percent of Indian online shoppers in the last 12 months), the U.K. (6 percent) and China (5 percent). India accounted for 5 percent of U.S. digital merchants’ cross-border transactions in 2015, Paypal said.20

In some cases, exports have tended to “follow the money,” so to speak, as $11 billion in remittances flowed from the U.S. to India in 2015.21 Experts note that the diaspora from various Indian states plays an important role in strengthening linkages between those states and the countries to which they have migrated, and this includes trade linkages.22

Generally, “most major U.S. companies are active in the market, which includes fast growing U.S. franchisors that are responding to changing consumer tastes and an increase in India’s middle class, particularly in tier 1 and tier 2 cities,” according to the U.S. government.23

Still, India ranks 102nd out of 136 countries in WEF’s Global Enabling Trade Index.24 The three most problematic factors for companies exporting to India are the high cost/delays of domestic transportation, theft and other crimes, corruption at the border, tariffs and non-tariff barriers, and burdensome import procedures.

Importing from India

India’s business process management industry is the largest outsourcing provider to companies around the world, with revenue of $28 billion in 2016, according to India’s National Association of Software and Services Companies.25 This is the context in which many U.S. companies do business with India.

“Indian conglomerates and high technology companies are generally equal in sophistication and prominence to their international counterparts,” according to the U.S. government. “Certain industrial sectors, such as information technology, telecommunications, and engineering are globally recognized for their innovation and competitiveness.”28

Setting up for International Trade in India

“Foreign companies operating in India emphasize that success requires a long-term planning horizon and a state-by-state strategy to adapt to the complexity and diversity of India’s markets,” the U.S. government reports.29

U.S. foreign direct investment (FDI) in India was $4.2 billion in 2015,30 in professional, scientific, and technical services, finance/insurance services, and information services, mainly in industries such as software and IT services, business services, financial services, pharmaceuticals, plastics and industrial machinery.31

Challenges to doing business are cited by the World Bank’s (WB’s) Ease of Doing Business Index, which rates India at 130th out of 190 countries worldwide.32 Particularly low grades are given in the categories of “trading across borders” (143) and “paying taxes” (172), although the rollout of a new, single national goods and services tax (GST) is intended to improve the situation. India gets better grades in the categories of “getting credit” (44) and “protecting minority investors” (13). U.S. companies face varied environments across India’s 29 states and seven union territories, due to India’s decentralized political system, with state-level differences in the quality of governance, regulation, taxation, labor relations, and education levels.33

Demand for skilled workers is high, particularly from the well-regarded Indian Institutes of Technology, both within India and from overseas employers. Overall, however, India ranks only 105th out of 130 countries in the World Economic Forum’s (WEF’s) Human Capital Index.

Cultural Considerations for International Trade

Advice on India’s business culture is extensive. For example, “Indians have a 'relativist' approach [versus ‘absolutist’], which sees everything as transient and subject to change, so they're likely to view a contract as a draft document subject to later amendment,” according to a recently published “how-to” in the Sydney Morning Herald.34 Other tips included leaving time for negotiation and building trust and respecting hierarchy. "Business people who can deal with uncertainty will do well in India, those who want everything to be black and white will struggle," the article concluded.

The Takeaway

India’s standout economic growth in a low-growth global economy combined with its rising middle class make it an attractive export market. Doing business there can be complicated, however, and advisors recommend companies deploy strategies that accommodate complexity and diversity.

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

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